This is Part 2 of a two-part blog post, where our team at Leverage Point dissects the impact of potential tariffs on the Canadian startup ecosystem.
In this post, we provide potential solutions that Canadian businesses, government, and other stakeholders can deploy to help startups create reduce their risk exposure from U.S.-based economic turbulence. Our companion post, which looks at what Canadian startups can do to expand their export strategies past reliance on the American market, is available here.
Support Local: an Action Plan for the Canadian Economy
Right now, Canadians are saying the right things when it comes to supporting local businesses – but what does that really mean, and how can we show real & tangible support for startups?
Trump’s tariff threats are a wake-up call for Canada’s public and private sectors to increase domestic support for Canadian startups. While startups have options to pivot and diversify their export and commercialization strategies, a whole-system approach is needed to increase domestic support for these companies.
Canadian startups need more support than is currently available within our country’s ecosystem, particularly on access to capital and scaling resources. A blended strategy between the public and private sectors can help create a domestic environment that will facilitate the commercialization and scaling of Canadian startups, here at home.
Where are the Canadian Customers?
One reason Canadian startups like to grow their operations in the U.S. is because there is more willingness to try new technologies within established companies, and a higher risk tolerance to work with early-stage companies. That willingness from corporations to work with innovative startups is much more conservative in Canada. Finding a first corporate or enterprise customer can be a challenge here, with longer sales cycles and lower conversion rates than working in a U.S. environment.
To resolve this issue, established Canadian companies can take on a higher risk profile when working with partners, as part of supporting our local economy. This isn’t just an act of charity – investing trust into an early-stage company will allow that startup to align more closely with the corporation’s needs, as that startup refines its product-market fit. The result will be a solution that more directly resolves the pain points that the corporation is experiencing, which can often be resolved by a qualified startup for a fraction of the cost it would take to develop in-house.
Changing procurement strategies is another tool we can collectively deploy to provide more opportunities within the Canadian marketplace. Although not just limited to startups, Canada’s current procurement process creates particularly high barriers to entry for startups. Prioritizing lowest-cost bids favours large companies who have already taken advantage of economies of scale within their internal operations, while the application process itself can be time-consuming and confusing for new business owners.
Procurement can be a powerful tool to support and validate local businesses, by allowing for the delivery services by local companies that will gain experience and recognition through fulfillment of that contract. The government in particular has a powerful economic argument to balance the potential reduction in margins by not accepting the lowest-bid procurement, and including the creation of jobs and internal local economic growth as decision-making factors.
The Capital Question: Raising Access to Early-Stage Funds
Strategically deploying capital (and enabling a more robust domestic investor ecosystem) is one of the most effective tools we can deploy as Canadians to grow domestic commercialization efforts. Our country has world-class levels of tax credits, grants and soft dollars when it comes to supporting research and development efforts, as well as targeted funds to hire technical staff. Unfortunately, little else exists when it comes time for companies looking to begin growing their sales funnel, or to help offset core operational expenses businesses need to incur to be able to scale.
For a startup to get the capital needed to grow, it needs a reliable source of funds. Our grant ecosystem does not currently provide much targeted approach for early sales support, or to provide some salary for the founding team to allow them to build the company full-time. With a reliance from potential corporate partners and challenging procurement rules, sales revenue and first customer acquisition can be especially challenging in the Canadian market.
In this scenario, the only other possible sources of funds are debt (which, for early companies, may require the founders to secure a personal guarantee or security), or equity through raising early-stage rounds from angel investors or VC funds. Unfortunately, Canada’s investor ecosystem is far behind its U.S. equivalent. Only 6% of public Canadian companies invest in direct VC investment, compared to over 40% in the U.S.
Source: BetaKit. “You can’t grow what you don’t seed, and we’re at risk of losing momentum in developing the next wave of high-growth startups,” – CVCA CEO Kim Furlong
A home base advantage does not truly exist for Canadian startups, with 53% of Canadian corporate VC capital deployed in 2023 being outside the country. Meanwhile, the number of early-stage VC deals in 2024 dropped by over 50% from the previous year, from $958M to $510M. Investors consistently state they want to emphasize proven and mature companies – which exacerbates the access to capital issue for early-stage companies.
Faced with a lack of early-stage equity financing, Canadian companies are forced to rely on organic growth, adopting a bootstrapping mentality to hit enough revenue targets and growth to be palatable to Canadian investors. This puts startups at a severe disadvantage to their competitors who have greater access to early-stage capital.
This is one of the reasons why Canadian companies have traditionally moved their operations to the U.S. when scaling – the difference in opportunity and advantage created by capital markets. Conversely, startups remaining in Canada who are bootstrapping with limited funds often need to make a difficult choice: scale back their commercialization efforts in order to raise early-stage equity rounds, or extend their commercialization timelines to account for a slower growth rate due to relying on sales revenue.
While the private sector has a lot of work to do to catch up to U.S. counterparts, the public sector can also play a role. Government grants can be expanded to include more support for commercialization efforts (offsetting the need for high-dilution equity raises by cash-strapped startups), and can be targeted to key priority industries such as CleanTech. The government can also adopt an early-customer mindset for early-stage companies, acting as the customer on paid pilot or small projects with Canadian startups – as well as easing procurement requirements in RFPs to make it easier for startups to successfully apply.
A Call to Action for Canadian Stakeholders
Canadian startups need broader ecosystem support to help navigate these economic choppy waters. For too long, our country has been complacent in letting talent and promising companies move to the U.S. – leading to a loss in domestic talent and expertise, technological growth, and economic potential.
Now, our startups need our help to grow that support and ability to scale within our own domestic market. Providing an opportunity to launch and grow early-stage companies in Canada will allow startups to identify robust market opportunities, work through the pain points of early customer acquisition and client management, and build up a replicable and scalable strategy which can be deployed in international export markets.
The long-term benefit for the Canadian economy cannot be understated. Not only will this approach create more high-demand and skilled jobs in Canada, but create spinoff economic benefits by retaining greater levels of wealth generation under our national tax jurisdiction. It will also position our country not only as a place where world-changing ideas are developed, but also commercialized and deployed on the world stage.
The cost of doing nothing is too great to ignore. By now, Canadians are well aware that our country needs a significant shift in our approach to economic growth and trade. Startups, who are key players in creating technologies and industries which drive economic, social, and environmental progress forward, must be considered in this new approach.